Up until the middle of 2012, there was one towering reason to buy shares in Aviva (LSE: AV) (NYSE: AV.US) — the dividend yield.
Aviva rewarded its investors with 6% and 6.5% in 2009 and 2010, and that was during the depths of the credit crunch. And it followed with 8.6% in 2012. By the end of that year, however, the share price was slipping as many were starting to fear that those levels could not be sustained for much longer — a crash in earnings per share (EPS) in 2011 had left the dividend only around 40% covered.
Crunch
The inevitable happened and the final dividend installment in 2012 was pared from 16p per share to just 9p, dropping the total from 26p to 19p. At the same time, Aviva ended its scrip dividend alternative as part of a plan to improve earnings per share.
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Describing 2012 as a year of transition, chief executive Mark Wilson told us that “The rebasing of the dividend and the elimination of the dilutive scrip is about giving certainty to shareholders, reducing debt, and putting Aviva in a sound position for the future“. The year’s dividend yield dropped to 5.1%, and then as low as 3.3% a year later.
Storming back
What’s so good about Aviva now?
One thing I like is that Aviva’s restructuring, which includes debt reduction, improving cashflow, strengthening of its capital position and refocusing on its core divisions, has already produced a leaner and fitter company. The disposal of assets that took place in 2012 did increase the company’s tangible leverage to 50%, which was high, but the firm set itself a target of below 40%.
A year later that was still unchanged, but by the interim stage of 2014 the leverage figure was down to 46%. As Mr Wilson told us at the time, “Aviva remains a work in progress“.
Earnings strengthening
Another thing I like is Aviva’s improving profit situation. At the end of 2013, cash remittances were up 40% with operating profit up 6%. And six months later, operating profit was up 4% with operating EPS up 16%. And again, expenses were being cut and debts reduced.
Over the past 12 months, the share price has gained a third to take it to 516p. But even after that, forecasts still suggest a modest forward P/E of 11 for this year, dropping to 10 in 2015.
And then back round to the dividend again, which is the key figure that I think brings this all together and makes Aviva look like a Buy to me.
Future cash
There’s an increase of 10% predicted this year with a further 15% boost penciled in for next — that would give us yields of 3.2% and 3.7% respectively. But the big difference this time is sustainability — the two predicted payments would be respectively covered 2.9 times and 2.7 times by earnings.
The yield at Aviva today might be lower than it was a few years ago, but it’s a far more reliable offering with a view to the long term — and I reckon we’ll looking at a very nice cash cow over the next 20 years.
